Managing your financial health promptly can seem challenging without the right guidance. The premium tax credit is a refundable tax credit in the United States that’s designed to help eligible individuals and families with low or moderate income afford marketplace health insurance. Its primary purpose is to offset the cost of health insurance premiums for those who qualify. Here’s what you need to know.
A financial advisor can help you create a financial plan to pay for your medical needs.
How the Premium Tax Credit Works
The premium tax credit operates on a sliding scale, with the credit amount increasing as income decreases. It is distributed directly to the insurance company, lowering your monthly premium. The credit can either be paid in advance to your insurance company, or claimed when you file your tax return for the year.
Your household income plays a critical role, as it must be at least 100% but no more than 400% of the federal poverty line for your family size, although these ranges may vary by state. You can verify these specifics on the official IRS website or related government platforms. If your income falls within these limits, you could be eligible for this credit, thereby significantly lowering your monthly health insurance premium. People with income higher than that may qualify for credits in 2024 if their premiums exceed 8.5% of their household income.
As an example, let’s consider a hypothetical scenario where a family of four, with an annual income of $65,000, qualifies for the premium tax credit. The credit could reduce their monthly premium by $333 per month, thereby providing easier access to health care. The actual savings may vary, but this case serves to demonstrate the potential for financial assistance provided by the premium tax credit.
Take note: Qualification limits are based on your modified adjusted gross income, which includes your adjusted gross income plus any tax-exempt interest, tax-exempt Social Security benefits, or certain foreign-earned income. This essentially means that all sources of income are considered when determining eligibility for the credit, not just your wages or salary.
Other Qualifications for Eligibility and Adjustments
In addition to income, you also can’t be eligible for other coverage, such as Medicare, Medicaid or affordable employer-sponsored insurance.
Your choice of health plan must also be from the health insurance marketplace.
Any changes such as a new job, the birth of a child or other circumstances affecting family size or income must also be updated on the health insurance marketplace to ensure accurate calculation.
Your tax filing status affects your premium tax credit amount. For instance, if you’re married but filing separately, you typically can’t claim the premium tax credit, unless you meet specific exceptions that a financial advisor can guide you through.
Lastly, you should keep in mind that if your income increases during the year, you may have to repay some or all of the premium tax credit when you file your tax return. Such situations could lead to an unexpected tax bill, emphasizing the importance of accurately estimating your income when applying for the credit.
Bottom Line
Understanding how the premium tax credit works will help you make smart financial decisions. But make sure you estimate your income correctly and check eligibility as income limits and federal poverty guidelines change each year to avoid unintended tax consequences.
Tips for Tax Planning
- A financial advisor with experience helping clients with their tax planning could be invaluable in being able to help you avoid certain tax liabilities and set your finances up for long-term success. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re just wanting to estimate your potential tax liability for a given year, consider using a tax calculator to help you do just that.
Photo credit: ©iStock.com/brizmaker, ©iStock.com/fizkes, ©iStock.com/Everyday better to do everything you love